Pension schemes 'not ready' for new rules on flexibility

People aged over 55 have been promised new flexibilities which will allow them to take the pension pots they have built up how they want, rather than being forced to buy a lifetime income known as an annuity

Pension savers have been promised the ability to draw money out of the pots in slices

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Pension savers are at risk of being unable to use their retirement pots like bank accounts next year because firms have not been given enough time to gear up for the changes, pension funds are warning.

With just five months to go before the Government’s retirement savings revolution is due to come into force, a list of 101 “uncertainties” over exactly how the reforms are intended to work has been drawn up by the National Association of Pension Funds (NAPF).

From next April, people aged over 55 have been promised new flexibilities which will allow them to take the pension pots they have built up how they want, rather than being forced to buy a lifetime income known as an annuity.

Instead of being charged a “punitive” 55% tax if they withdraw the whole pot, as would be the case for many people now, the over-55s will be able to take their money subject to their normal marginal tax rate.

They have also been promised the ability to draw money out of their pot in slices if they wish to, with 25% of each slice being tax-free.

But Graham Vidler, director of external affairs at the NAPF, said that while people will be able to get their hands on their money next year, “the challenge is that people have been told they will be able to use their pension like a bank account. There isn’t enough time for that to happen.

“There are thousands of schemes across the country and some will be able to find a way for people to take some slices out. Other schemes won’t be able to do that. They simply won’t have time to do it.”

People will be offered free impartial guidance, which will be delivered by Citizens Advice, to help them decide what to do with their pot.

The NAPF, which represents 1,300 schemes that provide pensions for more than 17 million people, said in its submission to MPs overseeing the Pension Schemes Bill that many questions over the reforms are yet to be fully answered.

It listed 101 questions which it said still needed fully answering, including how schemes should notify members of the tax and benefit implications of taking their pension as a lump sum and if schemes will have to track whether or not people have sought guidance.

Other questions it said had not been fully addressed included how schemes should deal with people who cannot decide what they want to do and how compliance will be monitored.

Yvonne Braun, head of savings, retirement and social care at the Association of British Insurers (ABI), said: “Insurers are working flat out to prepare for when pension flexibility comes into force in April 2015.

“However, the Government and regulators need to set out clearly what insurers and other pension scheme providers are able to say when communicating with their customers in order to help them make informed decisions.”

Raj Mody, head of PwC’s pension consulting practice, said: “Savers expecting to use their pensions like a bank account in April are going to be very disappointed, as pension providers are simply not going to magically transform over the next five months.”

In an article for Telegraph Money in September, Toby Strauss, chief executive of Scottish Widows, one of Britain’s biggest insurers with two million pension customers, wrote of his concerns about the industry’s ability to cope with the overhaul.

Mr Strauss wrote: “In the absence of any breathing space, we have concerns that the industry is in danger of reaching – and in fact breaching – its capacity to cope.”

He said Scottish Widows is investing tens of millions of pounds over the coming months and years “to make us better placed to deal with this new world”.

He continued: “This involves new customer service staff, upgrading IT systems and investing in training programmes. We are working with financial advisers, employers and the payroll industry, where we are also seeing capacity challenges.”

A Treasury spokeswoman said: “These concerns are ill-founded and border on scaremongering.

“Many of the questions raised by the NAPF have already been answered by command papers, draft regulations and legislation that is being considered by Parliament. The NAPF themselves have recognised this.

“Other questions in the list are not relevant to the reforms announced at Budget. These reforms are supported by the vast majority of pension providers and consumer groups.”